Major Chinese state-backed investments in Australia face an informal ban after the federal government acted on national security concerns to reject a nearly $300 million acquisition of building contractor Probuild by China’s largest construction company.

“Weaponising the concept of national security to block Chinese investment is detrimental to mutual trust as well as bilateral economic and trade relations.
“We urge the Australian government to provide a fair, open and non-discriminatory environment for all foreign investors, including Chinese enterprises as promised.”
Chinese companies are already looking to other parts of the world to make investments. Australia used to be top of the list for them.
Tom Story, Allens mergers and acquisitions partner
The Chinese builder withdrew its offer on Monday after Mr Frydenberg privately told the company the transaction was a risk to national security and contrary to Australia’s interest, on the grounds that Probuild is a significant construction player that is critical to the country’s economic and social wellbeing.
The move was first reported by the Financial Review early on Tuesday morning.
Inside the government and among commercial foreign investment advisers there is now widespread recognition Chinese-majority backed acquisitions, particularly by state-owned enterprises, face a very difficult task getting support from the Treasurer and national security agencies.
The government has secretly rejected several other Chinese takeovers over the past six months, beyond traditional critical infrastructure sectors, including in the construction and technology industries.
Probuild executive chairman Simon Gray slammed the rejection.
“No one can give us a real reason why were a national security risk,” he said. “It’s a joke.”
He said building projects deemed sensitive could have been carved out of the deal.
“They can always put conditions on the purchase to say You dont have an option in these markets’,” he said. “They just rejected it. That is outrageous. Politics is overriding any type of practicality.
Labor concerns
Labor MP Joel Fitzgibbon said the Foreign Investment Review Board now chaired by Australia’s former top intelligence chief and ambassador to China, David Irvine had morphed from an economic body into a national security regulator used as a political “tool” by the government.
“Long dependant on FDI [foreign direct investment], Australia is fast building a reputation as a difficult place to invest,” he said.
“Its time we had ‘in camera’ parliamentary committee scrutiny of the decisions and decision-making processes of both the FIRB and the treasurer of the day.”
Labor’s Joel Fitzgibbon wants more scrutiny of foreign investment decisions. Alex Ellinghausen
Tom Story, a mergers and acquisitions partner at law firm Allens, said that the Probuild decision reinforced a growing movement against Chinese investment in Australia.
“It’s another example of the difficulties that state-owned enterprises, particularly Chinese state-owned enterprises, have had and will have with acquisitions of Australian assets that are linked to sensitive sectors,” Mr Story said.
The defence, telecommunications, agriculture and data privacy industries were particularly risky.
Mr Story warned that this could then make acquisitions less attractive to buyers, as they may lose contracts in lucrative industries.
He predicted that FIRB’s increased scrutiny would drive Chinese investors away from Australia.
“Chinese companies are already looking to other parts of the world to make investments,” he said.
“Australia used to be top of the list for them, but they are now looking at Africa, South America and Eastern Europe those types of jurisdictions where their capital is actually wanted.”
A source close to foreign investment decisions said: “If you are a foreign government investor at the moment from China you basically have no hope unless you are a passive minority interest, and even then if you have a majority Australian consortium partner there are no guarantees.”
The government on January 1 commenced a new national interest test for foreign investment, for assets defined as a “sensitive national security business” such as those entities operating in the but not limited to energy, telecommunications, ports, water and data sectors.
The World Banks anti-corruption unit blacklisted CSCEC for six years in 2009 for engaging in collusive practices while bidding on a Philippines roads project.
The Treasurer wrote to China State Construction Engineering Corporation before Christmas informing it that he intended not to approve the deal, leading it to withdraw its application from the Foreign Investment Review Board in recent days.
Were not the scientists, were not the people doing the work. Were just building a building. This is politics.
Simon Gray, Probuild executive chairman
Acting Prime Minister Michael McCormack said on Tuesday the Treasurer would always act in Australia’s national interest on foreign investment decisions, but he declined to expand on the reasons behind Mr Frydenberg’s “rebuff”.
A spokesman for Mr Frydenberg said: The government does not comment on the application of the foreign investment screening arrangements as they apply or could apply to particular cases.
It is the latest Chinese foreign investment to be rejected by the government.
In April last year Mr Frydenberg rejected China Mengniu Dairy Co’sproposed $600 million acquisition of Lion Dairy & Drinks, even though the FIRB and Treasury supported the deal.
He also rejected Hong Kong-based CK Group’s $13 billion bid for Australia’s east coast gas pipeline owner APA Group in November 2018.
However, Hong Kong-listed China Mengniu Dairy’s $1.5 billion buyout of organic infant formula marker Bellamy’s Australia received conditional approval from Mr Frydenberg in 2019.
The Chinese embassy in Canberra in November released a document to Nine News outlining 14 grievances with Australia, including the blocking of 10 Chinese foreign investment deals across infrastructure, agriculture and animal husbandry sectors.
Rejection of the Probuild deal, eight months after FIRB first considered the transaction, will further inflame a relationship between Australia and China that has already been stretched by Beijing imposing trade sanctions on barley, beef, wine, coal and lobster.
China retaliated against Prime Minister Scott Morrison’s call for an international inquiry into the origins of the coronavirus pandemic.
Beijing was also angered by a ban on Chinese telco Huawei supplying the 5G wireless network and the Turnbull government’s foreign interference laws.
Last month Australia launched action in the World Trade Organisation over China’s punitive tariffs on barley.
Big disappointment
Probuild has been 88 per cent owned by Johannesburg-listed commercial builder Wilson Bayly Holmes-Ovcon (WBHO) since 2002.
More than 90 per cent of Probuild’s work in the past has typically been for private-sector clients, in residential, retail, hospitality and commercial office work, Mr Gray said.
It has done important public construction work, such as the $600 million-plus Cbus Property- and Keppel REIT-owned Victoria Police headquarters at 311 Spencer Street in Melbourne.
It is building PDG’s two-tower, 70,000sq m Elizabeth North project in Melbourne, which will form the headquarters of biotech company CSL.
While the police project was already completed, Probuild would still have access to potentially sensitive blueprints and information, which was a concern to the government’s national security agencies, sources said.
Mr Gray said one of the components of the deal was that the police headquarters contract for a building already completed would have remained with the South African parent.
There could have been many ways to deal with this matter and whatever concerns they may have had,” he said.
Mr Gray said the CSL development could also have been sequestered from the buyout deal with the Chinese.
Were building a building that is going to test research. Were not the scientists, were not the people doing the work. Were just building a building. This is politics.”
The deal, in which the Chinese company would have paid $200 million for Probuild and close to another $100 million for the cash it had on hand, was unlikely to be resurrected, he said.
Probuild’s South African parent company said it had “been advised by the potential acquirer of Probuild that it has withdrawn its proposed investment application in Probuild lodged with the Australian Foreign Investment Review Board following advice that its application would be rejected by the federal government on the grounds of national security.”
“WBHO notes that after significant time, investment and ongoing commitment from both WBHO and the potential acquirer in progressing the proposed transaction, due diligence was completed and commercial terms of the proposed transaction were otherwise materially agreed between the parties.”
“WBHO remains optimistic about the fundamentals of Probuild and its prospects in the Australian market and continues to assess all potential opportunities for Probuild to maximise shareholder value and the value and potential of Probuild.”
Probuild’s Mr Gray said it was less exposed to potentially significant infrastructure work such as rail, airports and tunnels than rival John Holland, acquired by China Communications Construction Company for $1 billion in 2015.
John Holland was previously one of the Australian Defence Department’s key providers of construction services and had worked on defence bases, but since being acquired by the Chinese has been forced to withdraw from defence projects.
Mr Gray questioned why the acquisition of Probuild could not have gone ahead with conditions around its involvement in sensitive work.
He said Probuild was a front-runner but was “cut out” of the chance to build a new $800 million vaccine lab at Melbourne’s Tullamarine airport in favour of Belgian-owned BESIX Watpac.
Mr Gray remains a shareholder in the company that WBHO secured control over in 2002 for what he said was “less than $20 million”. The failure of the deal to go through was disappointing for shareholders, but the bigger disappointment was that the company wouldn’t go into the hands of new owners with new ideas.
“Im still a shareholder,” Mr Gray said. “But Im not playing in this as an aggrieved shareholder. The bigger issue is where are the South Africans going to take the business?”